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Financial Accounting Outsourcing (FAO) Annual Report - January 2007

IT Outsourcing in the Small and Medium Businesses

So you decided to outsource your finance and accounting (F&A) processes to a supplier. Okay. So what happens to the F&A systems? Should you package them along with the people and processes and transfer them to the supplier?

Most people who have visited this question have chosen a "No;" only eight percent transferred ownership of systems to suppliers while outsourcing F&A processes. (Refer Figure 1)

Figure 1:

Why Have Most Companies Retained Their Systems?

To start with, there has been no compelling business case for most companies to change their F&A systems. Companies have invested heavily in them over a period of many years. For most companies, the F&A systems are working well. There also have been no new "game-changing" core financial systems available recently that would create a compelling case for change. So companies have adopted the philosophy, "If it ain't broke, don't fix it!"

Secondly, F&A systems are tied to every other system and process within a company. The process of untangling it from its mesh is a particularly complex one for an organization and involves significant investment. The process of outsourcing F&A processes, on the other hand, is relatively less complex. Therefore, the decision to outsource the easy-to-disaggregate F&A processes while retaining the difficult-to-disaggregate systems is a no-brainer.

Thirdly, and very importantly, CFOs (and their corporate auditors) attach additional risk to the proposition of handing over F&A systems to the same supplier who would also control their F&A processes. The separation of duties actually improves compliance. This is particularly important given that the cost of errors in financial data and financial systems is significant, tangible, and highly visible. Furthermore, if the same supplier takes over F&A processes as well as F&A systems, the potential switching costs (and operational complexity in switching) are expected to be far higher compared to when the supplier takes over only F&A processes.

The bottom line: most organizations have elected not to expose themselves too heavily to one supplier, unless its unique situation creates a very unique set of considerations.

Why Is This Different From HRO?

On the human resources outsourcing (HRO) side, systems are very often integrated with process outsourcing. In fact, having robust HR systems is, in many cases, the most important driver behind organizations going the HRO route.

While investing in F&A systems is an old story now (most companies have made large investments over a period of years), the investments in HR systems have not been as significant. There also are new 'game changing' HR software tools (ESS and MSS) that companies want, but find it difficult to make direct capital investments. Furthermore, HR systems are not as closely integrated with other systems as are F&A systems, and can therefore be replaced more easily.

A good way to obtain the latest HR technologies, yet avoid large investments, is to have the HRO supplier do it for you. This situation has coincided with the increasing maturity of HRO suppliers who have identified this potential and are offering bundled solutions, which has driven companies to consider HR process outsourcing and HR system implementation decisions together.

Can FAO Suppliers Afford To Be Technology Weaklings?

Not really. Although buyers retain the core financial systems, FAO suppliers often need to add technology tools as part of their offering. These "add-on" technology tools implement a variety of functionalities that enhance "outsourceability," including imaging, document management, workflow management, data warehousing, reporting, and user interface. These tools benefit both suppliers and buyers, although these benefits can be large or small depending on the buyer's starting point:

• For the supplier, such technology "add-ons" facilitate working remotely, provide an audit trail, improve quality control, increase productivity, and create value-added service offerings for the buyer
• For the buyers, these tools can provide an integrated view of data, reduce number of revisions required, reduce process costs, lower the error rate (improved data quality), and improve compliance

Therefore, even though FAO suppliers need not have the full technology solution that HRO suppliers are required to offer, they need to have sufficient capabilities and expertise to put these "add-on" technology systems in place, as and when needed. Going forward, we do Expect to see suppliers offering ever more sophisticated add-on technology in an attempt to move away from the commodity business of offering labor arbitrate. We will write more on this in subsequent articles.

Lessons from the Outsourcing Journal:

• Buyers need not go for an F&A system overhaul while outsourcing F&A processes. The core F&A systems at most buyer organizations are fairly robust and, in general, do not need costly replacements.
• Retaining existing F&A systems actually creates benefits for the buyer. The separation of duties helps compliance and the retention of systems helps lower switching costs.
• Suppliers should build out their add-on technology offerings rather than invest significant resources into developing capabilities around core systems. There are few instances in which buyers have given up ownership of their core systems to FAO suppliers, although the addition of technology tools such as workflow, document management, etc., is a requirement in most of the FAO contracts
• The technology aspect of the outsourcing solution is a key differentiator between FAO and HRO. Obtaining technology core systems has been a driver in HRO and rarely done in FAO. We don't see this changing any time soon.

Publish Date: March 2006

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